Subject to trilogues, tensions between member states, the EPBD will introduce stringent decarbonisation targets for new and existing real estate.
The decarbonisation targets of a key EU directive may be thwarted due to investors shying away from property renovation projects aimed at improving energy efficiency because they are being labelled as ‘brown’ in European sustainable finance legislation, according to experts.
Categorisations of building renovation activities under Europe’s Green Taxonomy and other rules should be amended to deliver the investment needed to meet targets set out in the revised Energy Performance of Buildings Directive (EPBD).
First introduced as part of the Fit for 55 (Ff55) raft of greenhouse gas (GHG) emission reduction measures, the European Commission proposed revisions to the EPBD to decarbonise existing buildings and build new zero-emission buildings across Europe by 2050. It includes the gradual introduction of minimum energy performance standards for the most carbon-intensive buildings and the requirement to utilise renewable energy systems in homes.
Once finalised, the EPBD requirements should have “a significant impact” on the construction and real estate sectors and will require “additional capital flows into renovations”, Jana Bour, ESG Policy and Advocacy Manager at the European Public Real Estate Association (EPRA), told ESG Investor.
But she said it is “critical” to “review the current legislative framework for sustainable finance to encourage investment in the transformation of the built environment”.
The EU’s environmental taxonomy, which outlines all sustainable economic activities for investors, lists energy renovations for ‘brown’ buildings as a ‘transitional activity’, which Bour said creates a perception in the market that investing in building renovations is not as sustainable as investing in new green builds or demolishing brown buildings.
It has also been argued that the Sustainable Finance Disclosure Regulation (SFDR) – which requires asset managers to categorise their sustainability-focused funds as Article 8 (environmental and/or social characteristics) or 9 (environmental and/or social objectives) and to disclose degree of alignment with the taxonomy – has a greater focus on the operational sustainability of existing ‘green’ real estate assets, as opposed to encouraging the transition of carbon-intensive assets.
“Persistent lack of alignment with these pieces of legislation will impact the implementation of the EPBD requirements,” Bour said.
“As long as renovations are not considered sustainable within the sustainable finance framework, investors will not be as incentivised to finance building renovations under the EPBD.”
Oliver Rapf, Executive Director of think tank Buildings Performance Institute Europe (BPIE), said greater coordination between Europe’s sustainable investment policies and sector-specific legislation such as the EPBD would happen over time.
When one piece of legislation precedes another that has some crossover, it is very much “part of the process” to revisit and ensure the two are aligned, he said.
“Updates to the taxonomy [and SFDR] will be made to make sure they are aligned in the future,” Rapf added.
Buildings are responsible for 40% of EU energy consumption and 36% of the bloc’s energy-related GHG emissions. Thirty-five percent of the EU’s buildings are over 50 years old and 75% are energy inefficient. Just 1% of these buildings are renovated each year; this is expected to at least double under the EPBD.
Fifty percent of all existing buildings need to be net zero by 2040, increasing to 85% by 2050, according to the International Energy Agency (IEA).
Before attempting to connect pieces of the wider legislative puzzle, the Council and Parliament first need to reach common ground on the EPBD.
A recent report published by BPIE outlined the key differences between the Council and Parliament’s iterations of the EPBD, and its recommendations for the finalised legislation.
While the Council acknowledged the importance of taking a full lifecycle approach to reducing the GHG emissions of buildings by proposing new construction discloses whole-life carbon emissions from 1 January 2030, BPIE said Parliament went a step further by articulating a timeline for the measurement of lifecycle emissions, disclosures, and limiting emissions over time.
“BPIE believes it is important to agree on the principles and sequence to guide the requirements to measure and assess lifecycle carbon emissions, but also to agree on the architecture of target values for the later identification and introduction of limit values,” the report said.
It noted that the Parliament’s overall EPBD iteration is stronger than the Council’s and should be “seen as the starting point for the negotiations”.
BPIE’s Rapf told ESG Investor that EU lawmakers also need to account for pressures on resourcing the scale of change the EPBD requires.
“The current rate of renovation will need to triple from current rates, meaning a huge increase in productivity is required, which requires more innovation in the construction sector,” he said.
The European Commission claims that the construction industry generates around 9% of Europe’s GDP and accounts for 18 million direct jobs.
Bour and Rapf echoed concerns that increasing political friction is delaying and/or weakening sustainability-focused legislation.
Last year, a coalition of EU countries led by Italy and Poland attempted to soften the EPBD’s minimum energy performance standards (MEPs). More recently, the Italian Minister of Infrastructure and Transport Matteo Salvini said the EPBD is “the umpteenth European choice against Italy”.
“There is concern that heated negotiations between member states will mean that they give up on the idea of a harmonised framework for the EPBD in an attempt to seek a compromised solution,” EPRA’s Bour said, warning that the market “desperately needs a more harmonised approach towards methodologies for calculating energy performance and certifications”.
“We see that friction; we see the danger,” Rapf from BPIE agreed. “But we also know that we can’t afford to lose this file or water it down.”
He pointed to the skyrocketing energy prices last winter prompted by the energy crisis as demonstrating the urgency and complexity of reform. “We now understand the threat to Europe’s energy security, and how easily people can slide into energy poverty. It simply isn’t sustainable for a government to subsidise high energy bills every winter – more drastic change is needed, such as making building stock more energy efficient and sustainable.”
Rapf added that the EPBD gives member states the flexibility and freedom to devise independent national strategies to achieve the EPBD targets, which will allow them to account for their own national circumstances.
“There is no need to water [the EPBD] down at the European level,” he said.
Depending on the outcome of ongoing debates between member states, trilogues are expected to conclude before the end of the year.